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HMRC internal manual

Employee Tax Advantaged Share Scheme User Manual

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HM Revenue & Customs
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Schedule 4 Company Share Option Plan (CSOP): Requirements relating to options: Exercise of options on cessation of employment

Unlike Schedule 3 (SAYE option schemes), Schedule 4 provides no statutory rights of exercise. Paragraph 24 allows for a scheme to provide for exercise on cessation of employment and paragraph 25 in the event of death. FA 2013 introduced Paragraph 25A which allows a scheme to provide for exercise on certain company events (see ETASSUM44410). It applies to all schemes including those approved before FA 2013 was enacted.

A company will normally consider it appropriate to determine what will happen to an option in the event of an option holder ceasing to be employed. As tax relief is provided in specific circumstances (good leavers), HMRC practice is for a scheme that provides for exercise on cessation to state what will happen in the good leaver circumstances (see ETASSUM44320, ETASSUM44330, ETASSUM44340 & ETASSUM44350). Stated practice is that there must be a clear right to exercise (or not exercise) in all of these circumstances. It follows that if there is a right to exercise in one or more of these circumstances, then the remaining circumstances not mentioned would have no right to exercise. As the right to exercise (or not exercise) is clearly stated then this is acceptable.

If the scheme rules were only to include a right to exercise on leaving for “any other reason” and this is subject to discretion, this would not be acceptable as the “any other reason” would include good leavers where there needs to be a clear right of exercise. The application of discretion in these circumstances means that that there is no clear right of exercise. The scheme rules would therefore only meet the requirements of Schedule 4 where good leaver circumstances are excluded from the application of discretion.